UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 
Form 10-Q
 
(mark one)
þQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 3, 2013.2, 2014.
OR
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from             to             
Commission file number: 001-35600
 
Five Below, Inc.
(Exact name of Registrant as Specified in its Charter)
 
Pennsylvania
75-3000378
(State or Other Jurisdiction of
Incorporation or Organization)

(I.R.S. Employer
Identification No.)
   
1818 Market Street, Suite 19002000  
Philadelphia, PA 19103
(Address of Principal Executive Offices) (Zip Code)
(215) 546-7909
(Registrant’s Telephone Number, Including Area Code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ý  Accelerated filer ¨
       
Non-accelerated filer 
x¨   (Do(Do not check if a smaller reporting company)
  Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý

The number of shares of the registrant’s common stock, $0.01 par value, outstanding as of September 9, 201310, 2014 was 54,040,270.54,303,812





FIVE BELOW, INC.
Index
INDEX
  Page
Page
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.





2



PART I—I - FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

FIVE BELOW, INC.
Consolidated Balance Sheets
(Unaudited)
(in thousands, except share and per share data)
August 3, 2013 February 2, 2013 July 28, 2012August 2, 2014 February 1, 2014 August 3, 2013
Assets          
Current assets:          
Cash and cash equivalents$21,088
 $56,081
 $17,676
$25,550
 $50,184
 $21,088
Inventories83,470
 60,831
 63,631
106,749
 89,377
 83,470
Prepaid income taxes837
 36
 10,577
2,247
 1,497
 837
Deferred income taxes1,807
 1,295
 
5,145
 4,586
 1,807
Prepaid expenses and other current assets14,182
 11,433
 12,155
19,913
 15,255
 14,182
Total current assets121,384
 129,676
 104,039
159,604
 160,899
 121,384
Property and equipment, net of accumulated depreciation and amortization of $37,717, $31,530, and $27,046 respectively65,555
 59,040
 49,039
Property and equipment, net of accumulated depreciation and amortization of $51,685, $43,997, and $37,717, respectively82,902
 70,381
 65,555
Deferred income taxes1,281
 232
 
Other assets601
 944
 1,116
293
 542
 601

$244,080
 $232,054
 $187,540
$187,540
 $189,660
 $154,194
     
Liabilities and Shareholders’ Equity          
Current liabilities:          
Line of credit$
 $
 $
$
 $
 $
Current portion of notes payable
 15,000
 1,000
Current portion of note payable
 19,500
 
Accounts payable32,174
 27,952
 28,064
46,529
 34,013
 32,174
Income taxes payable1,910
 7,083
 
1,748
 6,007
 1,910
Accrued salaries and wages2,044
 4,204
 2,830
3,364
 2,672
 2,044
Other accrued expenses14,402
 14,545
 11,496
19,279
 17,550
 14,402
Deferred income taxes
 
 1,045
Total current liabilities50,530
 68,784
 44,435
70,920
 79,742
 50,530
Notes payable19,500
 19,500
 33,750
Note payable
 
 19,500
Deferred rent and other33,894
 29,082
 26,294
40,442
 35,439
 33,894
Deferred income taxes1,645
 1,550
 2,949

 
 1,645
Total liabilities105,569
 118,916
 107,428
111,362
 115,181
 105,569
Commitments and contingencies (note 4)

 

 



 

  
Shareholders’ equity:          
Common stock, $0.01 par value. Authorized 120,000,000 shares; issued and outstanding 54,039,838, 53,980,797, and 53,972,006 shares, respectively.
540
 540
 540
Common stock, $0.01 par value. Authorized 120,000,000 shares; issued and outstanding 54,300,398, 54,190,724 and 54,039,838 shares, respectively.543
 542
 540
Additional paid-in capital276,225
 270,637
 266,594
289,066
 284,622
 276,225
Accumulated deficit(194,794) (200,433) (220,368)(156,891) (168,291) (194,794)
Total shareholders’ equity81,971
 70,744
 46,766
132,718
 116,873
 81,971
$187,540
 $189,660
 $154,194
$244,080
 $232,054
 $187,540
See accompanying notes to consolidated financial statements.


13



FIVE BELOW, INC.
Consolidated Statements of Operations
(Unaudited)
(in thousands, except share and per share data)
 
Thirteen Weeks Ended Twenty-Six Weeks EndedThirteen Weeks Ended Twenty-Six Weeks Ended
August 3, 2013 July 28, 2012 August 3, 2013 July 28, 2012August 2, 2014 August 3, 2013 August 2, 2014 August 3, 2013
Net sales$117,087
 $86,820
 $212,691
 $158,649
$152,479
 $117,087
 $278,483
 $212,691
Cost of goods sold77,687
 58,073
 143,078
 106,882
101,574
 77,687
 188,643
 143,078
Gross profit39,400
 28,747
 69,613
 51,767
50,905
 39,400
 89,840
 69,613
Selling, general and administrative expenses32,214
 24,012
 59,238
 48,997
37,570
 32,214
 71,243
 59,238
Operating income7,186
 4,735
 10,375
 2,770
13,335
 7,186
 18,597
 10,375
Interest expense, net391
 1,316
 902
 1,279
10
 391
 82
 902
Loss on debt extinguishment266
 1,587
 266
 1,587

 266
 244
 266
Other income
 (258) 
 (258)
Income before income taxes6,529
 2,090
 9,207
 162
13,325
 6,529
 18,271
 9,207
Income tax expense2,460
 843
 3,568
 72
5,005
 2,460
 6,871
 3,568
Net income4,069
 1,247
 5,639
 90
8,320
 4,069
 11,400
 5,639
Dividend paid to preferred and unvested restricted shareholders
 (65,403) 
 (65,403)
Net income attributable to participating securities(52) 
 (91) 

 (52) (38) (91)
Net income (loss) attributable to common shareholders$4,017
 $(64,156) $5,548
 $(65,313)
Basic income (loss) per common share$0.08
 $(3.41) $0.10
 $(3.71)
Diluted income (loss) per common share$0.07
 $(3.41) $0.10
 $(3.71)
Dividends declared and paid per common share$
 $2.02
 $
 $2.02
Net income attributable to common shareholders$8,320
 $4,017
 $11,362
 $5,548
Basic income per common share$0.15
 $0.08
 $0.21
 $0.10
Diluted income per common share$0.15
 $0.07
 $0.21
 $0.10
Weighted average shares outstanding:       
      
Basic shares53,334,551
 18,803,979
 53,138,198
 17,627,376
54,280,336
 53,334,551
 54,072,660
 53,138,198
Diluted shares53,804,539
 18,803,979
 53,601,459
 17,627,376
54,669,600
 53,804,539
 54,481,540
 53,601,459
See accompanying notes to consolidated financial statements.


24



FIVE BELOW, INC.

Consolidated Statement of Shareholders’ Equity
(Unaudited)
(in thousands, except share data)
 Shareholders’ Equity
Common stock 
Additional 
paid-in capital
 Accumulated deficit Total shareholders’ equity
Shares Amount 
Balance, February 2, 201353,980,797
 $540
 $270,637
 $(200,433) $70,744
Stock-based compensation expense8,419
 
 4,588
 
 4,588
Exercise of options to purchase common stock48,875
 
 209
 
 209
Vesting of restricted shares related to stock option exercises
 
 120
 
 120
Repurchase of unvested restricted shares related to stock option exercises(259) 
 
 
 
Excess tax benefit related to exercises of stock options
 
 590
 
 590
Issuance of common stock to employees under employee stock purchase plan2,006
 
 81
 
 81
Net income
 
 
 5,639
 5,639
Balance, August 3, 201354,039,838
 $540
 $276,225
 $(194,794) $81,971
   Shareholders’ Equity
 Common stock 
Additional
paid-in capital
 
Accumulated
deficit
 
Total
shareholders’ equity
 
 Shares Amount 
 Balance, February 1, 2014 54,190,724
 $542
 $284,622
 $(168,291) $116,873
 Stock-based compensation expense 2,123
 
 2,436
 
 2,436
 Exercise of options to purchase common stock 105,306
 1
 706
 
 707
 Vesting of restricted shares 
 
 61
 
 61
 Repurchase of unvested restricted shares related to stock option exercises (87) 
 
 
 
 Excess tax benefit related to exercises of stock options 
 
 1,136
 
 1,136
 Issuance of common stock to employees under employee stock purchase plan 2,332
   105
   105
 Net income 
 
 
 11,400
 11,400
 Balance, August 2, 2014 54,300,398
 $543
 $289,066
 $(156,891) $132,718
See accompanying notes to consolidated financial statements.

35



FIVE BELOW, INC.

Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Twenty-Six Weeks EndedTwenty-Six Weeks Ended
August 3, 2013 July 28, 2012August 2, 2014 August 3, 2013
Operating activities:      
Net income$5,639
 $90
$11,400
 $5,639
Adjustments to reconcile net income to net cash used in operating activities:   
Adjustments to reconcile net income to net cash provided by (used in) operating activities:   
Depreciation and amortization6,187
 4,342
8,042
 6,187
Gain on conversion of note payable
 (200)
Loss on disposal of software, property, and equipment384
 
Loss on debt extinguishment266
 1,587
244
 266
Loss on disposal of property and equipment28
 384
Amortization of deferred financing costs130
 305
12
 130
Warrant expense related to professional service providers for services rendered
 43
Stock-based compensation expense4,825
 8,241
2,441
 4,825
Deferred income tax (benefit) expense(417) 7,551
Other
 (71)
Deferred income taxes(1,608) (417)
Changes in operating assets and liabilities:   
 
Prepaid income taxes(801) (10,577)(750) (801)
Inventories(22,639) (24,841)(17,372) (22,639)
Prepaid expenses and other assets(2,764) (4,884)(4,665) (2,764)
Accounts payable3,426
 4,717
11,836
 3,426
Income taxes payable(5,173) (9,139)(4,259) (5,173)
Accrued salaries and wages(2,160) (6,424)692
 (2,160)
Deferred rent5,803
 6,228
5,025
 5,803
Other accrued expenses1,604
 2,460
1,553
 1,604
Net cash used in operating activities(5,690) (20,572)
Net cash provided by (used in) operating activities12,619
 (5,690)
Investing activities:     
Capital expenditures(15,140) (11,603)(19,700) (15,140)
Net cash used in investing activities(15,140) (11,603)(19,700) (15,140)
Financing activities:     
Borrowing under Term Loan Facility
 100,000
Repayment of Term Loan Facility(15,000) (65,250)
Repayment of note payable under Term Loan Facility(19,500) (15,000)
Cash paid for debt financing costs(40) (2,738)
 (40)
Repayment of note payable
 (50)
Dividend paid to shareholders
 (99,451)
Net proceeds from issuance of common stock81
 74,308
105
 81
Proceeds from exercise of warrants and stock options to purchase common stock209
 201
Proceeds from exercise of options to purchase common stock707
 209
Repurchase of unvested restricted shares related to stock option exercises(3) (17)(1) (3)
Excess tax benefit related to restricted shares and the exercise of stock options590
 1,555
Net cash (used in) provided by financing activities(14,163) 8,558
Excess tax benefit related to exercises of stock options1,136
 590
Net cash used in financing activities(17,553) (14,163)
Net decrease in cash and cash equivalents(34,993) (23,617)(24,634) (34,993)
Cash and cash equivalents at beginning of period56,081
 41,293
50,184
 56,081
Cash and cash equivalents at end of period$21,088
 $17,676
$25,550
 $21,088
   
Supplemental disclosures of cash flow information:   
Interest paid$97
 $858
Income taxes paid$12,393
 $9,367
Non-cash investing activities   
(Decrease) increase in accrued purchases of property and equipment$(891) $2,054
See accompanying notes to consolidated financial statements.

46



FIVE BELOW, INC.
Notes to Consolidated Financial Statements
(Unaudited)


(1)Summary of Significant Accounting Policies

(a)Nature of Business
(1)Summary of Significant Accounting Policies
(a)Nature of Business
Five Below, Inc. (individually and/or collectively with its wholly-ownedwholly owned subsidiary, referred to as the “Company”"Company") is a specialty value retailer offering merchandise targeted at the teen and pre-teen demographic. The Company offers an edited assortment of products, priced at $5 and below. The Company’s edited assortment of products includes select brands and licensed merchandise. The Company believes its merchandise is readily available, and that there are a number of potential vendors that could be utilized, if necessary, under approximately the same terms the Company is currently receiving; thus, it is not dependent on a single vendor or a group of vendors.

The Company is incorporated in the Commonwealth of Pennsylvania and, as of August 3, 20132, 2014, operated276 stores in Pennsylvania, New Jersey, Delaware, Maryland, Virginia, Massachusetts, New Hampshire, West Virginia, North Carolina, New York, Connecticut, Rhode Island, Ohio, Illinois, Indiana, Michigan, Missouri, Georgia, Texas, and Texas,Tennessee. As of August 2, 2014 and August 3, 2013, the Company operated 353 stores and 276 stores, respectively, each operating under the name “Five Below.”

On June 12, 2013,, the Company completed an internal business restructuring pursuant to which the Company formed Five Below Merchandising, Inc., a wholly-owned subsidiary (the “Subsidiary”), and transferred to the Subsidiary assets, operations and employees related to the Company's merchandising operations (the “Restructuring”). Following the Restructuring, the Subsidiary purchases and sells to the Company certain goods for sale at the Company's retail locations, and the Company provides to the Subsidiary back office support, office space and other services, in each case, pursuant to agreements between the Company and the Subsidiary. In connection with the Restructuring, on June 12, 2013, the Company amended and restated the Loan and Security Agreement (note 3) and certain other ancillary documents to the Company's Revolving Credit Facility (note 3) in order to, among other things, allow the Company to form and capitalize the Subsidiary and make the Subsidiary a party to the Loan and Security Agreement as a guarantor of the Company's obligations thereunder. The Subsidiary also acceded to the credit agreement and certain ancillary documents to the Company's Term Loan Facility (note 3) as a guarantor of the Company's obligations thereunder. For accounting purposes, the Company's consolidated financial statements include the accounts of the CompanyFive Below, Inc. and the Subsidiary. All intercompany transactions and accounts are eliminated in consolidation.the consolidation of the Company's and Subsidiary's financial statements.
(b)Fiscal Year

(b)Fiscal Year
The Company operates on a 52/53-week fiscal year ending on the Saturday closest to January 31. References to "fiscal year 2014" or "fiscal 2014" refer to the period from February 2, 2014 to January 31, 2015 and consists of a 52-week fiscal year. References to “fiscal year 2013” or “fiscal 2013” refer to the period from February 3, 2013 to February 1, 2014 and consists of a 52-week fiscal year. References to “fiscal year 2012” or “fiscal 2012” refer to the period from January 29, 2012 to February 2, 2013 and consistedconsists of a 53-week fiscal year. The fiscal quarters ended August 2, 2014 and August 3, 2013 and July 28, 2012 refer to the thirteen week periodsweeks ended as of those dates. The year-to-date periods ended August 2, 2014 and August 3, 2013 and July 28, 2012 refer to the twenty-six week periodsweeks ended as of those dates.

(c)Basis of Presentation
The consolidated balance sheets as of August 2, 2014 and August 3, 2013, and July 28, 2012, the consolidated statements of operations for the thirteen and twenty-six weeks ended August 2, 2014 and August 3, 2013, and July 28, 2012, the consolidated statement of shareholders’ equity for the twenty-six weeks endedAugust 3, 20132, 2014 and the consolidated statements of cash flows for the twenty-six weeks ended August 2, 2014 and August 3, 2013 and July 28, 2012 have been prepared by the Company in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim reporting and are unaudited. In the opinion of management, the aforementioned financial statements include all known adjustments (which consist primarily of normal, recurring accruals, estimates and assumptions that impact the financial statements) necessary to present fairly the financial position at the balance sheet dates and the results of operations and cash flows for the periods ended August 2, 2014 and August 3, 2013 and July 28, 2012.2013. The balance sheet as of February 2, 2013,1, 2014, presented herein, has been derived from the audited balance sheet included in the Company's Annual Report on Form 10-K for fiscal 20122013 as filed with the Securities and Exchange Commission on March 28, 201326, 2014 and referred to herein as the “Annual Report,” but does not include all disclosures required by U.S. GAAP. These consolidated financial statements should be read in conjunction with the financial statements for the fiscal year ended February 2, 20131, 2014 and footnotes thereto included in the Annual Report. The consolidated results of operations for the thirteen and twenty-six weeks ended August 2, 2014 and August 3, 2013 and July 28, 2012 are not necessarily indicative of the consolidated operating results for the year ending February 1, 2014January 31, 2015 or any other period. The Company's business is seasonal and as a result, the Company's net sales fluctuate from quarter to quarter. Net sales are usually highest in the fourth fiscal quarter due to the year-end holiday season.
(d) Use of Estimates

The preparation of the consolidated financial statements requires management of the Company to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, valuation allowances for inventories, income taxes and stock-based compensation expense.

57



(d)(e) Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities measured at fair value are classified using the following hierarchy, which is based upon the transparency of inputs to the valuation at the measurement date:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Inputs, other than Level 1, that are either directly or indirectly observable.
Level 3: Unobservable inputs developed using the Company’s estimates and assumptions which reflect those that market participants would use.
The classification of fair value measurements within the hierarchy is based upon the lowest level of input that is significant to the measurement.
The Company’s financial instruments consist primarily of cash equivalents, accounts payable, and borrowings, if any, under a line of credit and the Term Loan Facility (as defined in note 3).credit. The Company believes that: (1) the carrying value of cash equivalents and accounts payable are representative of their respective fair value due to the short-term nature of these instruments; and (2) the carrying value of the borrowings, if any, under the line of credit and Term Loan Facility approximates their fair value because the line of credit’s and Term Loan Facility's interest rates vary with market interest rates. The Company considers the inputs utilized to determine the fair value of any of the borrowings under the Term Loan Facilityline of credit to be Level 2 inputs. As of August 2, 2014, February 1, 2014, and August 3, 2013,February 2, 2013, and July 28, 2012, the Company had cash equivalents of $4.3 million, $5.9 million, $35.72.3 million and $11.6$3.2 million,, respectively. The Company’s cash equivalents consist of credit card receivables and a money market account for which fair value was determined based on Level 1 inputs.

(2)(f) Income (Loss) Per Common ShareRecently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued an accounting standards update that clarifies the principles for recognizing revenue from contracts with customers. The update outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The guidance is effective for the interim and annual periods beginning on or after December 15, 2016. The update allows for a “full retrospective” adoption, meaning the update is applied to all periods presented, or a “modified retrospective” adoption, meaning the update is applied only to the most current period presented in the financial statements. Early adoption is not permitted. The Company is currently evaluating the impact that the update will have on its financial position, results of operations, cash flows and financial statement disclosures.
(2)Income Per Common Share
Basic income (loss) per common share amounts are calculated using the weighted-average number of common shares outstanding for the period. Diluted income (loss) per common share amounts are calculated using the weighted-average number of common shares outstanding for the period and include the dilutive impact of preferred stock using the if-converted method and exercise of stock options and warrants, as well as assumed lapse of restrictions on restricted stock awards and shares currently available for purchase under the Company's Employee Stock Purchase Plan, which is minor, using the treasury stock method.

The two-class method is used to calculate basic and diluted income (loss) per common share for the applicable periods since certain of the Company’s preferred andCompany's restricted stock are participating securities under Accounting Standards Codification (“ASC”)ASC 260 Earnings per share. The two-class method is an earnings allocation formula that determines income per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. Under the two-class method, basic income (loss) per common share is computed by dividing net income (loss) attributable to common shares after allocation of income to participating securities by the weighted-average number of common shares outstanding during the period.year. Diluted income (loss) per common share is computed using the more dilutive of the two-class method or the if-converted method. In periods of net loss, no effect is given to participating securities since they do not contractually participate in the losses of the Company.


68



The following table reconciles net income and the weighted average common shares outstanding used in the computations of basic and diluted income (loss) per common share (in thousands, except for share and per share data):
 Thirteen Weeks Ended Twenty-Six Weeks Ended
August 3, 2013 July 28, 2012 August 3, 2013 July 28, 2012
Numerator:       
Net income$4,069
 $1,247
 $5,639
 $90
Dividend paid to preferred shareholders
 (62,504) 
 (62,504)
Dividend paid to unvested restricted shareholders
 (2,899) 
 (2,899)
Net income attributable to participating securities(52) 
 (91) 
Net income (loss) attributable to common shareholders$4,017
 $(64,156) $5,548
 $(65,313)
Denominator:       
Weighted-average common shares outstanding - basic53,334,551
 18,803,979
 53,138,198
 17,627,376
Dilutive impact of options and employee stock purchase plan469,988
 
 463,261
 
Weighted-average common shares outstanding - diluted53,804,539
 18,803,979
 53,601,459
 17,627,376
Per common share:       
Basic income (loss) per common share$0.08
 $(3.41) $0.10
 $(3.71)
Diluted income (loss) per common share$0.07
 $(3.41) $0.10
 $(3.71)
 Thirteen Weeks Ended Twenty-Six Weeks Ended
 August 2, 2014 August 3, 2013 August 2, 2014 August 3, 2013
Numerator:       
Net income$8,320
 $4,069
 $11,400
 $5,639
Net income attributable to participating securities
 (52) (38) (91)
Net income attributable to common shareholders$8,320
 $4,017
 $11,362
 $5,548
Denominator:       
Weighted average common shares outstanding - basic54,280,336
 53,334,551
 54,072,660
 53,138,198
Dilutive impact of options and employee stock purchase plan389,264
 469,988
 408,880
 463,261
Weighted average common shares outstanding - diluted54,669,600
 53,804,539
 54,481,540
 53,601,459
Per common share:       
Basic income per common share$0.15
 $0.08
 $0.21
 $0.10
Diluted income per common share$0.15
 $0.07
 $0.21
 $0.10

For the twenty-six weeks ended August 2, 2014, $38.0 thousand of net income was attributable to participating securities, as the two-class method was more dilutive, and the remainder was attributable to common shareholders.
For the thirteen and twenty-six weeks endedAugust 3, 2013,, $52.0 $52.0 thousand and $91.0$91.0 thousand,, respectively, of net income was attributable to participating securities, as the two-class method was more dilutive, and the remainder was attributable to common shareholders. For the thirteen and twenty-six weeks endedJuly 28, 2012, as the Company was in a net loss position, the net losses were solely attributable to common shareholders.

The Company's preferred stock (note 5) was converted to common stock on July 24, 2012 and was included in the computation of loss per share during the thirteen and twenty-six weeks endedJuly 28, 2012 on a weighted-average basis.

The effects of the assumed exercise of stock options for 376,040555,081 and 245,996581,127 shares of common stock for the thirteen and twenty-six weeks endedAugust 3, 2013,2, 2014, respectively, were excluded from the calculation of diluted net income per share as their impact would have been anti-dilutive.

The effects of the assumed exercise of the combined stock options for 376,040 and warrants and vesting of restricted share awards of 2,588,032245,996 shares of common stock as of July 28, 2012for the thirteen and twenty-six weeks ended August 3, 2013, respectively, were excluded from the calculation of diluted net loss for the thirteen and twenty-six weeks endedJuly 28, 2012,income per share as the effecttheir impact would be anti-dilutive due to the net losses attributable to common shareholders.

have been anti-dilutive.
The aforementioned excluded shares do not reflect the impact of any incremental repurchases under the treasury stock method.

(3)Term Loan Facility and Line of Credit

(3)Term Loan Facility and Line of Credit
Term Loan Facility
On May 16, 2012, the Company entered into a $100.0 million term loan facilityTerm Loan Facility with Goldman Sachs Bank USA as administrative agent for a syndicate of lenders (the “Term Loan Facility”). The Company used the net proceeds from the Term Loan Facility and cash on hand to pay a dividend on all outstanding shares of the Company's common and preferred stock (note 5), totaling $99.5 million. On the same day, the Company amended and restated its existing senior secured Revolving Credit Facility with Wells Fargo Bank, National Association, which is defined below under “—Line of Credit.”


7



The Term Loan Facility provided for a term loan of $100.0 million and matures on the earlier of (i) May 16, 2015 and (ii) the date on which such facility is accelerated following the occurrence of an event of default. The Term Loan Facility provides for interest on borrowings, at the option of the Company, at an alternate base rate which is the greater of (i) the administrative agent’s prime rate in effect on such day and (ii) the federal funds effective rate in effect on such day plus 0.50% with a 2.00% floor, plus a margin of 3.25%, or a London Interbank Offer Rate (“LIBOR”) based rate with a 1.00% floor plus a margin of 4.25%. The credit agreement for the Term Loan Facility includes a maximum consolidated net leverage ratio financial covenant, the calculation of which allows the Company to net up to $10.0 million of its cash and cash equivalents against its indebtedness. The Company’s leverage ratio must not exceed 2.75x to 2.50x for the testing periods in calendar year 2013, 2.00x for the testing periods in calendar year 2014 and 1.75x thereafter.

The credit agreement for the Term Loan Facility also includes customary negative and affirmative covenants including, among others, limitations on the Company’s ability to: (i) incur additional debt; (ii) create liens; (iii) make certain investments, loans and advances; (iv) sell assets; (v) pay dividends or make distributions or other restricted payments; (vi) engage in mergers or consolidations; or (vii) change its business.

The Term Loan Facility is subject to repayment upon the receipt of certain proceeds, including those from the sale of certain assets, insurance proceeds and indebtedness not otherwise permitted. The Term Loan Facility was also subject to repayment of $50.0 million upon the receipt of proceeds from the Company’s initial public offering (the “IPO”). The Company closed its IPO on July 24, 2012. In July 2012, the Company repaid $65.3 million of principal on the Term Loan Facility and $0.7 million of interest. In October 2012 and May 2013, the Company repaid $0.3 million and $15.0 million, respectively, of principal on the Term Loan Facility. As of August 3, 2013, the balance outstanding under the Term Loan Facility was $19.5 million, bearing interest at a rate of 5.25%. During the thirteen and twenty-six weeks endedAugust 3, 2013, the Company paid interest of approximately $0.3 million and $0.8 million, respectively, related to the Term Loan Facility. Pursuant to the terms of the Term Loan Facility, due to the repayment of $65.3 million of principal under the Term Loan Facility in July 2012, the Company is no longer required to make minimum quarterly payments. The remaining unpaid balance will be due upon maturity.

In connection with the Term Loan Facility, the Company incurred deferred financing costs of $2.7 million which are being amortized over the term of the Term Loan Facility. The amortization is included in interest expense, net, in the consolidated statements of operations. In connection with the $65.3 million principal repayment on the Term Loan Facility in July 2012 and the $15.0 million principal repayment on the Term Loan Facility in May 2013, approximately $1.6 million and $0.3 million, respectively, of the deferred financing costs were written off and included in loss on debt extinguishment in the consolidated statements of operations for the thirteen and twenty-six weeks endedJuly 28, 2012 and August 3, 2013. The remaining deferred financing costs, net of amortization, are included in other assets on the balance sheet as of August 3, 2013.

Amounts under the credit agreement for the Term Loan Facility may become due upon certain events of default including, among others, failure to comply with the credit agreement’s covenants, bankruptcy, default on certain other indebtedness or a change in control. The default rate under the Term Loan Facility is 2.00% per annum.

On June 12, 2013,, in connection with the Restructuring, the Subsidiary acceded to the credit agreement and certain ancillary documents to the Company's Term Loan Facility as a guarantor of the Company's obligations thereunder.

All obligations In February 2014, the Company repaid the remaining principal balance outstanding under the Term Loan Facility are secured by substantially all of the Company’s assets and are guaranteed by the Subsidiary. As of August 3, 2013, the Company was in compliance with the financial covenant and other covenants applicable to it under the Term Loan Facility.$19.5 million.

Line of Credit
On August 18, 2006, the Company entered into a loan and security agreement (the “Loan and Security Agreement”) with Wachovia Bank National Association (predecessor in interest to Wells Fargo Bank, National Association) that included a revolving line of credit with advances tied to a borrowing base. The Loan and Security Agreement has been amended and/or restated several times, the latest on June 12, 2013 (as amended and restated, the “Revolving Credit Facility”), generally to extend the maturity date, increase maximum borrowings, adjust the applicable interest rates, permit the formation and capitalization of subsidiaries, make the Subsidiary a party to the agreement as a guarantor of the Company'sour obligations and modify certain definitions.



9


The Revolving Credit Facility allows maximum borrowings of $20.0$20.0 million with advances tied to a borrowing base and expires on the earliest to occur of (i) May 16, 2017 (ii) the date which is 45 days prior to the maturity date of the Term Loan Facility if the Term Loan Facility remains outstanding or (iii)(ii) upon the occurrence of an event of default. The Revolving Credit Facility may be increased to $30.0 million upon certain conditions. The Revolving Credit Facility includes a $5.0$5.0 million sub limit sub-limit for the issuance of letters of credit. The borrowing base is 90% of eligible credit card receivables plus 90% of the net recovery percentage of eligible inventory less established reserves. In connection with the

8



Revolving Credit Facility, the Company incurred deferred financing costs of $50 thousand in May 2012, which are being amortized over the remaining term of the Revolving Credit Facility.

The Revolving Credit Facility provides for interest on borrowings, at the Company's option, at (a) a prime rate plus a margin of (i) 0.75%if excess availability is greater than or equal to 75%, (ii) 1.0% if excess availability is less than 75%but greater than or equal to 33% or (iii) 1.25%if excess availability is less than 33% or (b) a LIBOR-based rate plus a margin of (i) 1.75% if excess availability is greater than or equal to 75%, (ii)2.00% if excess availability is less than 75% but greater than or equal to 33% or (iii) 2.25% if excess availability is less than 33%. The Revolving Credit Facility further provides for a letter of credit fee equal to the LIBOR-based rate plus (i) 1.75% if excess availability is greater than or equal to 75%, (ii) 2.00% if excess availability is less than 75% but greater than or equal to 33% or (iii) 2.25% if excess availability is less than 33%. The Revolving Credit Facility also contains an unused credit facility fee of 0.375% per annum and is subject to a servicing fee of approximately $12$12.0 thousand per year.

The Revolving Credit Facility includes a covenant which requires the Company to maintain minimum excess collateral availability of no less than the greater of (i)10%of the then effective maximum credit and (ii)$3.0 million.

The Revolving Credit Facility also includes customary negative and affirmative covenants including, among others, limitations on the Company’sCompany's ability to (i) incur additional debt; (ii) create liens; (iii) make certain investments, loans and advances; (iv) sell assets; (v) pay dividends or make distributions or other restricted payments; (vi) engage in mergers or consolidations; or (vii) change the Company's business.

Additionally, the Revolving Credit Facility is subject to payment upon the receipt of certain proceeds, including those from the sale of certain assets and is subject to an increase in the interest rate on borrowings and the letter of credit fee of 2.0% upon an event of default. Amounts under the Revolving Credit Facility may become due upon certain events of default including, among others, failure to comply with the Revolving Credit Facility'sFacility’s covenants, bankruptcy, default on certain other indebtedness or a change in control.

As of August 3, 2013,2, 2014, the Company had no borrowings outstandingunder the Revolving Credit Facility and had approximately$19.1 million of the $20.0 million available on the line of credit under the Revolving Credit Facility, as approximately $0.9 million was outstanding in letters of credit.

All obligations under the Revolving Credit Facility are secured by substantially all of the Company’sCompany's assets and are guaranteed by the Subsidiary. As ofAugust 3, 2013,2, 2014, the Company was in compliance with the covenants applicable to it under the Revolving Credit Facility.

(4)Commitments and Contingencies
(4)Commitments and Contingencies

The Company leases property and equipment under non-cancelable operating leases. Certain retail store lease agreements provide for contingent rental payments ifDuring the store’s net sales exceed stated levels (percentage rents) and/or contain escalation clauses, which provide for increases in base rental for increases in future operating costs. Many of the Company’s leases provide for one or more renewal options for periods ranging from five to seven years. The Company’s operating lease agreements, including assumed extensions which are generally those that take the lease to a ten-year term, expire through 2023.


9



The Company’s minimum rental commitments under operating lease agreements, including assumed extensions, as of August 3, 2013, are as follows (in thousands):
 
Retail
stores
 
Corporate
office and
distribution
centers
 Total
Fiscal year:     
Remaining 2013$21,366
 $1,762
 $23,128
201444,476
 4,413
 48,889
201544,014
 4,678
 48,692
201643,033
 3,097
 46,130
201742,609
 2,610
 45,219
Thereafter165,118
 13,031
 178,149
 $360,616
 $29,591
 $390,207
Rent expense, including base and contingent rent under operating leases, was $10.1 million and $8.2 million for the thirteen weeks endedAugust 3, 2013 and July 28, 2012, respectively. Contingent rents were $0.2 million and $0.1 million for2, 2014, the Company committed to 16 new store leases with terms of 10 years that have future minimum lease payments of approximately $27.4 million.
During the thirteen weeks ended August 2, 2014, the Company signed a lease for a new distribution center in Oldmans Township, New Jersey to support the Company's anticipated growth, which the Company expects to be fully operational during the fiscal year ended January 30, 2016. The Company will initially occupy approximately 700,000 square feet and will expand to approximately one million square feet.  Thelease agreement expires in 2025 with options to renew for three successive five-year periods with future minimum lease payments of approximately $44.6 million.
From August 3, 2013 and July 28, 2012, respectively.

Rent expense, including base and contingent rent under operating2014 to September 11, 2014, the Company committed to 5 new store leases was $19.6 million and $15.2 million for the twenty-six weeks endedAugust 3, 2013 and July 28, 2012, respectively. Contingent rents were $0.3 million and $0.2 million for the twenty-six weeks endedAugust 3, 2013 and July 28, 2012, respectively.

with terms of 10 years that have future minimum lease payments of approximately $7.8 million.
The Company has employment agreements with certain key employees that provide for, among other things, salary, bonus, severance, and change-in-control provisions. The severance and change of control provisions under these agreements provide for additional payments upon employee separation of up to approximately $3.95.7 million.

From time to time, the Company is involved in certain legal actions arising in the ordinary course of business. In management’s opinion, the outcome of such actions will not have a material adverse effect on the Company’s financial condition or results of operations.

As of August 3, 2013,2, 2014, the Company has other purchase commitments of approximately $0.4$0.4 million consisting of purchase agreements for materials that will be used in the construction of new stores.

(5)Shareholders’ Equity
(5)In Shareholders’ Equity

As of August 3, 2013March 2012, the Company is authorized to issue 120,000,000 shares of common stock, $0.01 par value, and 5,000,000 shares of preferred stock, $0.01 par value. The holders of common stock are entitled to one vote per share of common stock and are entitled to receive dividends if declared by the board of directors. The preferred stock may be issued from time to time in series as designated by the board of directors. The designations, powers, preferences, voting rights, privileges, options, conversion rights and other special rights of the shares of each such series of preferred stock and the qualifications, limitations and restrictions thereof shall be designated by the board of directors.

Preferred Stock
On October 14, 2010, the Company issued 89,291,773 shares of Series A 8% Convertible Preferred Stock for cash proceeds of $191.9 million, net of offering costs of $2.1 million. The shares of Series A 8% Convertible Preferred Stock were entitled to receive cumulative dividends of 8% of their original issue price of $2.17 per share per year compounded annually and payable in cash when and if declared by the Company’s board of directors; however, the Company could not pay, unless otherwise consented to by the holders of Series A 8% Convertible Preferred Stock, any dividends on common stock unless an equal amount of dividends per share (on an as converted basis) was simultaneously paid to the holders of the Series A 8% Convertible Preferred Stock. Effective immediately prior to the closing of the IPO on July 24, 2012, all outstanding shares of Series A 8% Convertible Preferred Stock were converted into 30,894,953 shares of common stock and ceased to be entitled to the payment of any dividends that accrued on such shares as of the effective time of the conversion.


10



In the event of any liquidation, dissolution, or winding up of the Company, as defined, or deemed liquidation event, as defined, the holders of the Series A 8% Convertible Preferred Stock were entitled to receive the greater of the original issue price of $2.17 per share plus any accrued and unpaid dividends, or the amount that would have been paid if the Series A 8% Convertible Preferred Stock was converted to common stock, before any payment was made to the common shareholders. The Series A 8% Convertible Preferred Stock was presented outside of shareholders’ equity (deficit) since its redemption under certain circumstances was beyond the control of the Company’s management.

Common Stock
In March 2012, options to purchase 2,020,620 shares of common stock granted during the fiscal year ended January 29, 2011,2010, including options to purchase 1,010,310 shares that were subject to time-based and performance-based vesting, were cancelled and an equal number

10


of restricted shares were granted. One-third of the shares vested immediately in March 2012 and another, one-third of the shares vested in March 2013. The remaining2013, and the last one-third will vestvested in March 2014.
In connection with the cancellation and grant, the Company will recordrecorded total compensation expense of $17.4 million, of which including $5.3 million which was recorded on the date of the modification and the remainder, is beingwhich was recorded on a straight-line basis over the two-year vesting period.

On July 17, 2012, the Company amended its articles of incorporation to reflect a 0.3460-for-1 reverse stock split of
its common stock. The amendment also changed the authorized shares of the Company's common stock to 120,000,000 shares.
Concurrent with the reverse stock split, the Company adjusted (i) the conversion price of its Series A 8% Convertible Preferred
Stock, (ii) the number of shares subject toremaining expense and the exercise price of its outstanding stock option awards under its equity
incentive plan and (iii) the number of shares subject to and the exercise price of its outstanding warrants to equitably reflect the
split. All common stock share and per-share data included in the consolidated financial statements and footnotes thereto give effectvesting related to the reverse stock splitcancellation and grant was recognized during the change in authorized shares and have been adjusted retroactively for all periods presented.

On September 27, 2012, the Company’s boardfirst quarter of directors approved the Five Below, Inc. 2012 Employee Stock Purchase Plan (the “ESPP”), which remained subject to shareholder approval. The Company's shareholders approved the ESPP on May 30, 2013, at the Company's annual meeting of shareholders. The number of shares of common stock reserved for issuance, which is subject to other limitations, is 2014.500,000 shares. The ESPP allows eligible employees the opportunity to purchase shares of the Company’s common stock through payroll deductions at a discount of 10% of the fair market value of such shares on the purchase date. The ESPP's effective date is retroactive to January 1, 2013 and is intended to be qualified as an “employee stock purchase plan” within the meaning of Section 423 of the Internal Revenue Code of 1986.

On February 4, 2013, the Company completed a secondary public offering of 13,012,250 shares of common stock at a price of $35.65 per share. The shares sold in the secondary public offering were registered under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to the Company's registration statements on Form S-1 (File No. 333-186043 and File No. 333-186275), which were declared effective by the Securities and Exchange Commission on January 29, 2013. All of the shares sold in the secondary public offering were sold by selling shareholders and the Company did not receive any proceeds. The Company incurred fees of approximately $1.0 million related to legal, accounting and other fees in connection with the secondary public offering, which are included in selling, general and administrative expenses in the fiscal 2012 statement of operations.

On July 1, 2013, the Company completed a secondary public offering of 6,900,000 shares of common stock at a price of $36.00 per share. The shares sold in the secondary public offering were registered under the Securities Act pursuant to the Company's registration statement on Form S-1 (File No. 333-188578), which was declared effective by the Securities and Exchange Commission on June 26, 2013. All of the shares sold in the secondary public offering were sold by selling shareholders and the Company did not receive any proceeds. The Company incurred fees of approximately $1.0 million related to legal, accounting and other fees in connection with the secondary public offering, which are included in selling, general and administrative expenses in the consolidated statements of operations for the thirteen and twenty-six weeks endedAugust 3, 2013.

(6)Share-Based Compensation
(6)Common Stock Options

Equity Incentive Plan
Effective July 26, 2002, the Company adopted the 2002 Equity Incentive Plan (the “Plan”) pursuant to which the Company’s board of directors may grant stock options, restricted shares, and restricted sharesstock units to officers, directors, key employees and professional service providers. The Plan, as amended, allows for the issuance of up to a total of 7,600,000 shares under the Plan. As of August 2, 2014, 4,331,622 stock options, restricted shares, or restricted stock units were available for grant.
Common Stock Options
All stock options have a term not greater than 10ten years. Stock options vest and become exercisable in whole or in part, in accordance with vesting conditions set by the Company’s board of directors. Options granted to date generally vest over four years from the date of grant. As of August 3, 2013, 4,520,782 stock options or restricted shares were available for grant.

11




On August 25, 2010, the Company’s board of directors agreed to allow option holders, as of that date, to exercise, during a twenty day offer period, all options issued and outstanding under the Plan, regardless if those options were vested and exercisable (“Vested Options”) or were not currently vested and exercisable (“Unvested Options”). On October 13, 2010, the holders of the stock options exercised all of their outstanding Vested Options and Unvested Options to purchase shares of the Company’s common stock. The Unvested Options were exercised for restricted shares of common stock that have the same vesting schedule as the Unvested Options that were exercised for those shares. The restricted shares are subject to repurchase by the Company should the option holder’s employment be terminated prior to the vesting at a purchase price equal to the lesser of: (i) the exercise price paid for the restricted shares, and (ii) the fair market value of the restricted shares at the time of repurchase. For accounting purposes, as the shares remain subject to their original vesting provisions, the early exercises are being recorded as if the original options remain outstanding until the respective shares vest. Exercise proceeds received prior to the shares vesting are recorded as a deposit liability in other accrued expenses on the balance sheets. As of August 3, 2013, $0.2 million was recorded as a deposit liability.

The following table summarizes the activity related to the restricted shares of common stock (in thousands, except share data):
 
Number of
shares
 
Deposit
liability
Unvested, February 2, 201331,542
 $308
Vested(17,019) (120)
Repurchases upon employee termination(259) (3)
Unvested, August 3, 201314,264
 $185

Stock option activity under the Plan was as follows:
Options
outstanding
 
Weighted
average
exercise
price
 
Weighted
average
remaining
contractual
term
Options
Outstanding
 Weighted
Average
Exercise
Price
 Weighted
Average
Remaining
Contractual
Term
Balance at February 2, 2013 1,187,817
 $10.43
 9.3
Balance as of February 1, 20141,304,620
 $20.90
 8.5
Granted518,500
 37.98
 219,631
 30.21
 
Forfeited(19,467) 9.35
 (113,196) 32.73
 
Cancelled(35,300) 30.19
 (20,000) 39.41
 
Exercised(48,875) 4.28
 (105,306) 6.72
 
Balance at August 3, 20131,602,675
 $19.11
 9.0
Exercisable at August 3, 201383,767
 $4.37
 7.8
Balance as of August 2, 20141,285,749
 22.32
 8.3
Exercisable as of August 2, 2014372,036
 $9.15
 7.4

The fair value of each option award granted to employees, including outside directors, is estimated on the date of grant and the fair value of each option award granted to non-employees is estimated on the date of grant and is required to be periodically revalued over the contractual period until the option award is exercised or forfeited using the Black-Scholes option-pricing model with the following weighted average assumptions:
Twenty-Six Weeks EndedTwenty-Six Weeks Ended
August 3, 2013 July 28, 2012August 2, 2014 August 3, 2013
Expected volatility50.0% 50.0%47.0% 50.0%
Risk-free interest rate1.5% 1.4%1.9% 1.5%
Expected life of options - for employee grants6.3 years
 6.3 years
Expected life of options6.4 years
 6.3 years
Expected dividend yield% %% %

The Company uses the simplified method to estimate the expected term of the option. The expected volatility incorporates historical and implied volatility of similar entities whose share priceprices are publicly available. The risk-free rate for the expected term of the option wasis based on the U.S. Treasury yield curve in effect at the time of grant.


12



The per-share weighted average grant-date fair value of stock options granted to employees, including outside directors, for the twenty-six weeks ended August 2, 2014 and August 3, 2013 was $17.74 and July 28, 2012$18.62, respectively.

11


Restricted Stock Units and Performance-Based Restricted Stock Units
All restricted stock units ("RSU") and performance-based restricted stock units ("PSU") vest in accordance with vesting conditions set by the compensation committee of the Company’s board of directors. RSU's granted to date have vesting periods ranging from less than one year to five years from the date of grant. PSU's granted to date vest 100% at the end of a cumulative three year performance period, subject to satisfaction of the applicable performance goals established for the respective grant. The Company periodically assesses the probability of achievement of the performance criteria and adjusts the amount of compensation expense accordingly. Compensation is recognized over the vesting period and adjusted for the probability of achievement of the performance criteria.
RSU and PSU activity during the twenty-six weeks ended August 2, 2014 was $18.62 and $4.85, respectively.as follows:
 Restricted Stock UnitsPerformance-Based Restricted Stock Units
 Number Weighted-Average Grant Date Fair Value Number Weighted-Average Grant Date Fair Value
Balance as of February 1, 2014
 $
 
 $
Granted162,222
 35.93
 84,094
 35.88
Vested
 
 
 
Forfeited
 
 (3,874) 38.71
Balance as of August 2, 2014162,222
 $35.93
 80,220
 $35.74

As of August 3, 2013,2, 2014, there was $17.719.1 million of total unrecognized compensation costs related to non-vested share-based compensation arrangements granted under the Plan, whichPlan. That cost is expected to be recognized over a weighted average vesting period of 2.73.1 years.

(7)Income Taxes
(7)Income Taxes

The following table summarizes the Company’s income tax expense and effective tax rates for the thirteen and twenty-six weeks ended August 2, 2014 and August 3, 2013 and July 28, 2012 (in thousands):
 Thirteen Weeks Ended Twenty-Six Weeks Ended
August 3, 2013 July 28, 2012 August 3, 2013 July 28, 2012
Income (loss) before income taxes$6,529
 $2,090
 $9,207
 $162
Income tax expense (benefit)$2,460
 $843
 $3,568
 $72
Effective tax rate37.7% 40.3% 38.8% 44.4%
 Thirteen Weeks Ended Twenty-Six Weeks Ended
August 2, 2014 August 3, 2013 August 2, 2014 August 3, 2013
Income before income taxes$13,325
 $6,529
 $18,271
 $9,207
Income tax expense$5,005
 $2,460
 $6,871
 $3,568
Effective tax rate37.6% 37.7% 37.6% 38.8%

The effective tax rates for the thirteen and twenty-six weeks ended August 2, 2014 and August 3, 2013 and July 28, 2012 were based on the Company’s forecasted annualized effective tax rates and were adjusted for discrete items that occurred within the periods presented. The effective tax rate for the thirteen and twenty-six weeks endedAugust 3, 20132, 2014 is being impacted by changes in the mix of projected pretax income across state jurisdictions and the Company's operating entities as a result of the Restructuring.

For the thirteen weeks endedAugust 3, 2013 and July 28, 2012, total income taxes paid were $1.3 million and $1.8 million, respectively. For the twenty-six weeks endedAugust 3, 2013 and July 28, 2012, total income taxes paid were $9.4 million and $10.7 million, respectively.

The Company had no material accrual for uncertain tax positions or interest or penalties related to income taxes on the Company’s consolidated balance sheets atas of August 3, 20132, 2014, February 2, 2013 and July 28, 20121, 2014, or August 3, 2013 and has not recognized any material uncertain tax positions or material interest and/or penalties related to income taxes in the consolidated statements of operations for the thirteen weeks and twenty-six weeks ended August 2, 2014 or August 3, 20132013. and July 28, 2012.

The Company files a federal income tax return as well as state tax returns. The Company’s U.S. federal income tax returns for the fiscal years ended January 30, 20102011 and thereafter remain subject to examination by the U.S. Internal Revenue Service (“IRS”). State returns are filed in various state jurisdictions, as appropriate, with varying statutes of limitation and remain subject to examination for varying periods up to 3 to 4 years depending on the state.

(8)    Related-Party Transactions

During the thirteen weeks endedAugust 3, 2013 and July 28, 2012, the Company incurred fees of $0.7 million and $1.4 million, respectively, related to services provided by certain shareholders and professional service firms for which certain shareholders are partners. Fees related to the thirteen weeks endedJuly 28, 2012 were primarily IPO-related fees.

During the twenty-six weeks endedAugust 3, 2013 and July 28, 2012, the Company incurred fees of $1.0 million and $2.7 million, respectively, related to services provided by certain shareholders and professional service firms for which certain shareholders are partners. Fees related to the twenty-six weeks endedJuly 28, 2012 were primarily IPO-related fees.


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ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion together with “Selected Financial Data”and Other Data,” and the consolidated financial statements and related notes included in our Annual Report on Form 10-K for our fiscal year ended February 2, 20131, 2014 and referred to herein as the “Annual"Annual Report," and the consolidated financial statements and related notes as of and for the thirteen and twenty-six weeks ended August 3, 20132, 2014 included in Part I, Item 1I of this Quarterly Report on Form 10-Q. The statements in this discussion regarding expectations of our future performance, liquidity and capital resources and other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described below in “Special Note Regarding Forward-Looking Statements” and in Part II, "Item 1A. RiskItem 1A "Risk Factors." Our actual results may differ materially from those contained in or implied by any forward-looking statements.
We operate on a fiscal calendar widely used by the retail industry that results in a given fiscal year consisting of a 52- or 53-week period ending on the Saturday closest to January 31 of the following year. References to "fiscal year 2014" or "fiscal 2014" refer to the period from February 2, 2014 to January 31, 2015 and consists of a 52-week fiscal year. References to “fiscal year 2013” or “fiscal 2013” refer to the period from February 3, 2013 to February 1, 2014 and consists of a 52-week fiscal year. References to “fiscal year 2012” or “fiscal 2012” refer to the period from January 29, 2012 to February 2, 2013 and consistedconsists of a 53-week fiscal year. The fiscal quarters and year-to-date periods ended August 3, 20132, 2014 and July 28, 2012August 3, 2013 refer to the 13-weekthirteen weeks ended as of those dates. The year-to-date periods ended August 2, 2014 and 26-weekAugust 3, 2013 periodsrefer to the twenty-six weeks ended as of those dates. Historical results are not necessarily indicative of the results to be expected for any future period and results for any interim period may not necessarily be indicative of the results that may be expected for a full year.


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts or present facts or conditions, such as statements regarding our future financial condition or results of operations, our prospects and strategies for future growth, the introduction of new merchandise, and the implementation of our marketing and branding strategies. In many cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or the negative of these terms or other comparable terminology.

The forward-looking statements contained in this Quarterly Report on Form 10-Q reflect our views as of the date of this report about future events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause events or our actual activities or results to differ significantly from those expressed in any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, actions, levels of activity, performance or achievements. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements, including, but not limited to, those factors described in Part I, “Item 1A. RiskItem 1A “Risk Factors” in our Annual Report, as amended by the risk factors included in Part II, “Item 1A. Risk Factors”Item 1A "Risk Factors" in this Quarterly Report on Form 10-Q. These factors include without limitation:

failure to successfully implement our growth strategy;
disruptions in our ability to select, obtain, distribute and market merchandise profitably;
extreme weather conditions in the areas in which our stores are located could negatively affect our business and results of operations;
our ability to successfully expand our distribution network capacity;
disruptions to our distribution network or the timely receipt of inventory;
inability to attract and retain qualified employees;
ability to increase sales and improve the efficiencies, costs and effectiveness of our operations;
our dependence on our executive officers and other key personnel or our inability to hire additional qualified personnel;

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our ability to successfully manage our inventory balances and inventory shrinkage;
our lease obligations;
changes in our competitive environment, including increased competition from other retailers and the presence of online retailers;
increasing costs due to inflation, increased operating costs or energy prices;
the seasonality of our business;
disruptions to our information technology systems in the ordinary course or as a result of system upgrades;
our failure to maintain adequate internal controls;
our ability to obtain additional financing;

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our failure to secure customers’ confidential or credit card information, or other private data relating to our employees or our company;
natural disasters, unusual weather conditions, pandemic outbreaks, global political events, war and terrorism;
current economic conditions and other economic factors;
the impact of governmental laws and regulations and the outcomes of legal proceedings;
our inability to protect our brand name, trademarks and other intellectual property rights;
increased costs as a result of being a public company; and
restrictions imposed by our indebtedness on our current and future operations.

Readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on these forward-looking statements. All of the forward-looking statements we have included in this quarterly reportQuarterly Report on Form 10-Q are based on information available to us on the date of this report. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as otherwise required by law.


Overview
Five Below Inc. is a rapidly growing specialty value retailer offering a broad range of trend-right, high-quality merchandise targeted at the teen and pre-teen customer. We offer a dynamic, edited assortment of exciting products, all priced at $5 and below, including select brands and licensed merchandise across our category worlds. As of August 3, 2013,2, 2014, we operated 276353 stores in 1920 states.


How We Assess the Performance of Our Business
In assessing the performance of our business, we consider a variety of performance and financial measures. These key measures include net sales, comparable store sales, cost of goods sold and gross profit, selling, general and administrative expenses and operating income.

Net Sales
Net sales constitute gross sales net of merchandise returns for damaged or defective goods. Net sales consist of sales from comparable stores and non-comparable stores. Revenue from the sale of gift cards is deferred and not included in net sales until the gift cards are redeemed to purchase merchandise.

Our business is seasonal and as a result, our net sales fluctuate from quarter to quarter. Net sales are usually highest in the fourth fiscal quarter due to the year-end holiday season.

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Comparable Store Sales
Comparable store sales include net sales from stores that have been open for at least 15 full months from their opening date. Comparable stores include the following:

Stores that have been remodeled while remaining open;
Stores that have been relocated within the same trade area, to a location that is not significantly different in size, in which the new store opens at about the same time as the old store closes; and
Stores that have expanded, but are not significantly different in size, within their current locations.

For stores that are relocated or expanded, the following periods are excluded when calculating comparable store sales:

The period beginning when the closing store receives its last merchandise delivery from one of our distribution centers through:
the last day of the fiscal year in which the store was relocated or expanded (for stores that increased significantly in size); or
the last day of the fiscal month in which the store re-opens (for all other stores); and
The period beginning on the first anniversary of the date the store received its last merchandise delivery from one of our distribution centers through the first anniversary of the date the store re-opened.


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We had historically excluded stores that are relocated or expanded during the period of construction and pre-opening starting when the store closed. During the second quarter of 2013, we changed our comparable store sales calculation to exclude relocated or expanded stores starting when a store receives its last merchandise delivery from one of our distribution centers. This change would not significantly impact our historical comparable store sales calculations as previously reported.

There may be variations in the way in which some of our competitors and other retailers calculate comparable or “same store” sales. As a result, data in this quarterly reportQuarterly Report on Form 10-Q regarding our comparable store sales may not be comparable to similar data made available by other retailers. Non-comparable store sales are comprised of new store sales, sales for stores not open for a full 15 months, and sales from existing store relocation and expansion projects that were temporarily closed (or not receiving deliveries) and not included in comparable store sales.

Measuring the change in fiscal year-over-year comparable store sales allows us to evaluate how our store base is performing. Various factors affect comparable store sales, including:

consumer preferences, buying trends and overall economic trends;
our ability to identify and respond effectively to customer preferences and trends;
our ability to provide an assortment of high-quality, trend-right and everyday product offerings that generate new and repeat visits to our stores;
the customer experience we provide in our stores;
the level of traffic near our locations in the power, community and lifestyle centers in which we operate;
competition;
changes in our merchandise mix;
pricing;
our ability to source and distribute products efficiently;
the timing of promotional events and holidays;
the timing of introduction of new merchandise and customer acceptance of new merchandise;
our opening of new stores in the vicinity of existing stores;
the number of items purchased per store visit; and
weather conditions.

Opening new stores is an important part of our growth strategy. As we continue to pursue our growth strategy, we expect that a significant percentage of our net sales will continue to come from new stores not included in comparable store sales. Accordingly, comparable store sales is only one measure we use to assess the success of our growth strategy.

Cost of Goods Sold and Gross Profit
Gross profit is equal to our net sales less our cost of goods sold. Gross margin is gross profit as a percentage of our net sales. Cost of goods sold reflects the direct costs of purchased merchandise and inbound freight, as well as store occupancy, distribution and buying expenses. Store occupancy costs include rent, common area maintenance, utilities and property taxes for all store locations. Distribution costs include costs for receiving, processing, warehousing and shipping of merchandise to or from our distribution centers and between store locations. Buying costs include compensation expense and other costs for our internal buying organization.

organization, including our merchandising and product development team and our planning and allocation group. These costs are significant and can be expected to continue to increase as our company grows.
In July 2014, we signed a lease for a new distribution center in Oldmans Township, New Jersey to support our anticipated growth, which we expect to be fully operational during the fiscal year ended January 30, 2016. We will initially occupy approximately 700,000 square feet and will expand to approximately one million square feet. Delays in opening this new distribution center could adversely affect our future operations by slowing store growth, which could in turn reduce sales growth. In addition, any distribution-related construction or expansion projects entail risks which could cause delays and cost

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overruns, such as: shortages of materials; shortages of skilled labor or work stoppages; unforeseen construction, scheduling, engineering, environmental or geological problems; weather interference; fires or other casualty losses; and unanticipated cost increases. The completion date and ultimate cost of this new distribution center, planned for the fiscal year ended January 30, 2016, could differ significantly from initial expectations due to construction-related or other reasons. In addition, the timing and amount of investments in our infrastructure and systems could affect the comparability of our results of operations in future periods.
The components of our cost of goods sold may not be comparable to the components of cost of goods sold or similar measures of our competitors and other retailers. As a result, data in this quarterly reportQuarterly Report on Form 10-Q regarding our gross profit and gross margin may not be comparable to similar data made available by our competitors and other retailers.

The variable component of our cost of goods sold is higher in higher volume quarters because the variable component of our cost of goods sold generally increases as net sales increase. We regularly analyze the components of gross profit as well as gross margin. Any inability to obtain acceptable levels of initial markups, a significant increase in our use of markdowns, and a significant increase in inventory shrinkage or inability to generate sufficient sales leverage on the store occupancy, distribution and buying components of costs of goods sold could have an adverse impact on our gross profit and results of operations. Changes in the mix of our products may also impact our overall cost of goods sold.

Selling, General and Administrative Expenses
Selling, general and administrative, or SG&A, expenses are composed of payroll and other compensation, marketing and advertising expense, depreciation and amortization expense and other selling and administrative expenses. SG&A expenses as a percentage of net sales are usually higher in lower sales volume quarters and lower in higher sales volume quarters.

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The components of our SG&A expenses may not be comparable to those of other retailers. We expect that our SG&A expenses will increase in future periods due to our continuing store growth and in part due to additional legal, accounting, insurance and other expenses we expect to incurare incurring as a result of being a public company. Among other things, we expect thatthe on-going compliance with the Sarbanes-Oxley Act of 2002 and related rules and regulations could resulthave resulted in significant incremental legal, accounting and other overhead costs. In addition, any increase in future stock option or other stock-based grants or modifications will increase our stock-based compensation expense included in SG&A.

Operating Income
Operating income equals gross profit less SG&A expenses. Operating income excludes interest expense or income, loss on debt extinguishment and income tax expense or benefit. We use operating income as an indicator of the productivity of our business and our ability to manage SG&A expenses. Operating income percentage measures operating income as a percentage of our net sales.


Stock Split
On July 17, 2012, we amended our articles of incorporation to reflect a 0.3460-for-1 reverse stock split of our common stock. The amendment also changed the authorized shares of our common stock to 120,000,000 shares. Concurrent with the reverse stock split, we adjusted (i) the conversion price of our Series A 8% convertible preferred stock, (ii) the number of shares subject to and the exercise price of our outstanding stock option awards under our equity incentive plan and (iii) the number of shares subject to and the exercise price of our outstanding warrants to equitably reflect the split. All common stock share and per-share data presented in this quarterly report gives effect to the reverse stock split and the change in authorized shares and have been adjusted retroactively for all periods presented.



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Results of Consolidated Operations
The following tables summarize key components of our results of consolidated operations for the periods indicated, both in dollars and as a percentage of our net sales.
Thirteen Weeks Ended Twenty-Six Weeks EndedThirteen Weeks Ended Twenty-Six Weeks Ended
August 3, 2013 July 28, 2012 August 3, 2013 July 28, 2012August 2, 2014 August 3, 2013 August 2, 2014 August 3, 2013
(in millions, except total stores)
Statements of Operations Data: (1)
       
Consolidated Statements of Operations Data (1):
       
Net sales$117.1
 $86.8
 $212.7
 $158.6
$152.5
 $117.1
 $278.5
 $212.7
Cost of goods sold77.7
 58.1
 143.1
 106.9
101.6
 77.7
 188.6
 143.1
Gross profit39.4
 28.7
 69.6
 51.8
50.9
 39.4
 89.8
 69.6
Selling, general and administrative expenses32.2
 24.0
 59.2
 49.0
37.6
 32.2
 71.2
 59.2
Operating income7.2
 4.7
 10.4
 2.8
13.3
 7.2
 18.6
 10.4
Interest expense, net0.4
 1.3
 0.9
 1.3

 0.4
 0.1
 0.9
Loss on debt extinguishment0.3
 1.6
 0.3
 1.6

 0.3
 0.2
 0.3
Other income
 (0.3) 
 (0.3)
Income before income taxes6.5
 2.1
 9.2
 0.2
13.3
 6.5
 18.3
 9.2
Income tax expense2.5
 0.8
 3.6
 0.1
5.0
 2.5
 6.9
 3.6
Net income$4.1
 $1.2
 $5.6
 $0.1
$8.3
 $4.1
 $11.4
 $5.6
Percentage of Net Sales:       
Percentage of Net Sales (1):
       
Net sales100.0% 100.0 % 100.0% 100.0 %100.0% 100.0% 100.0% 100.0%
Cost of goods sold66.3% 66.9 % 67.3% 67.4 %66.6
 66.3
 67.7
 67.3
Gross profit33.7% 33.1 % 32.7% 32.6 %33.4
 33.7
 32.3
 32.7
Selling, general and administrative expenses27.5% 27.7 % 27.9% 30.9 %24.6
 27.5
 25.6
 27.9
Operating income6.1% 5.5 % 4.9% 1.7 %8.7
 6.1
 6.7
 4.9
Interest expense, net0.3% 1.5 % 0.4% 0.8 %
 0.3
 
 0.4
Loss on debt extinguishment0.2% 1.8 % 0.1% 1.0 %
 0.2
 0.1
 0.1
Other income% (0.3)% % (0.2)%
Income before income taxes5.6% 2.4 % 4.3% 0.1 %8.7
 5.6
 6.6
 4.3
Income tax expense2.1% 1.0 % 1.7%  %3.3
 2.1
 2.5
 1.7
Net income3.5% 1.4 % 2.7% 0.1 %5.5% 3.5% 4.1% 2.7%
Operational Data:              
Total stores at end of period276
 226
 276
 226
353
 276
 353
 276
Comparable store sales growth6.6% 8.6 % 5.4% 9.4 %
Comparable stores sales growth3.2% 6.6% 4.6% 5.4%
Average net sales per store (2)
$0.4
 $0.4
 $0.8
 $0.8
$0.4
 $0.4
 $0.8
 $0.8
(1)Components may not add to total due to rounding.
(2)
Only includes stores open during the full period.thirteen weeks ended and twenty-six weeks ended presented periods.


Thirteen Weeks Ended August 2, 2014 Compared to the Thirteen Weeks Ended August 3, 2013 Compared to the Thirteen Weeks EndedJuly 28, 2012

Net Sales
Net sales increased to $117.1$152.5 million in the thirteen weeks ended August 2, 2014 from $117.1 million in the thirteen weeks ended August 3, 2013, from $86.8 an increase of $35.4 million, in the thirteen weeks endedJuly 28, 2012, anincrease of $30.3 million, or 34.9%30.2%. The increase was the result of a non-comparable store sales increase of $25.2$32.1 million and a comparable store sales increase of $5.1 million.$3.3 million. The increase in non-comparable store sales was primarily driven by new stores in fiscal 2014 and the number of stores that opened in fiscal 20122013 but have not been open for 15 full months and new stores.months. We plan to open 60 net newapproximately 62 stores duringin fiscal 2013.2014.

Comparable store sales increased 6.6%3.2% for the thirteen weeks endedAugust 3, 20132, 2014 compared to the thirteen weeks endedJuly 28, 2012. August 3, 2013. This increase resulted from an increase of approximately 5.9%2.4% in the number of transactions in our stores and an increase in the average dollar value of transactions of approximately 0.7%0.8%.

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Cost of Goods Sold and Gross Profit
Cost of goods sold increased to $101.6 million in the thirteen weeks ended August 2, 2014 from $77.7 million in the thirteen weeks endedAugust 3, 2013, an from $58.1 million in the thirteen weeks endedJuly 28, 2012, anincrease of $19.6$23.9 million,, or 33.8%30.7%. The increase in cost of goods sold was primarily the result of a $14.7 millionan increase in the merchandise costs of goods resulting from anthe increase in sales, a $2.6 millionnet sales. Also contributing to the increase in cost of goods sold were an increase in store occupancy costs as a result ofresulting from new store openings and a $1.8 millionan increase in distribution costs primarily due to anthe increase in sales as well as the opening of a second distribution center.net sales.

Gross profit increased to $39.4$50.9 million in the thirteen weeks ended August 2, 2014 from $39.4 million in the thirteen weeks ended August 3, 2013, from $28.7 an increase of $11.5 million, in the thirteen weeks endedJuly 28, 2012, anincrease of $10.7 million, or 37.1%29.2%. Gross margin increaseddecreased to 33.4% for the thirteen weeks ended August 2, 2014 from 33.7% in the thirteen weeks endedAugust 3, 2013, from 33.1% for the thirteen weeks endedJuly 28, 2012, an increase a decrease of approximately 6030 basis points. The increasedecrease in gross margin was primarily the result of the storedriven by occupancy costs increasing at a lower rate than the increase in net sales as well as the timing of new store openings, which increased margin by approximately 110 basis points. This increase was partially offset by the increase in distribution costs due to the opening of a second distribution center, which decreased margin by approximately 60 basis points.

costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $32.2$37.6 million in the thirteen weeks ended August 2, 2014 from $32.2 million in the thirteen weeks ended August 3, 2013, from $24.0 an increase of $5.4 million, in the thirteen weeks endedJuly 28, 2012, anincrease of $8.2 million, or 34.2%16.6%. As a percentage of net sales, selling, general and administrativeSG&A expenses decreased approximately 20290 basis points to 27.5%24.6% in the thirteen weeks endedAugust 3, 20132, 2014 compared to 27.7%27.5% in the thirteen weeks endedJuly 28, 2012. August 3, 2013. The increase in selling, general and administrativeSG&A expense was primarily the result of increases of $4.8$5.8 million in store-related expenses primarily to support new store growth $2.0and $1.9 million of corporate relatedcorporate-related expenses, partially offset by a decrease of $1.3 million in stock-based compensation expense and $1.0$1.0 million of fees incurred forrelated to our secondary public offering.

Interest Expense, Net
Interest expense, net decreased to $0.4 million inoffering that was incurred during the thirteen weeks endedAugust 3, 2013 from $1.3 million of interest expense, net in the thirteen weeks endedJuly 28, 2012, adecrease of $0.9 million. The decrease in interest expense resulted from the decrease in the outstanding balance of our Term Loan Facility (see –“Liquidity and Capital Resources-Term Loan Facility” section below).

Loss on Debt Extinguishment
Loss on debt extinguishment decreased to $0.3 million in the thirteen weeks endedAugust 3, 2013 from $1.6 million in the thirteen weeks endedJuly 28, 2012, a decrease of $1.3 million.2013. The decrease in stock-based compensation was driven by the loss on debt extinguishment is duedecrease of expense related to the $15.0 million repayment oncancellation of certain stock options in exchange for the $100.0 million Term Loan Facilitygrant of restricted shares in March 2012. The remaining expense and vesting related to the cancellation of certain stock options in exchange for the grant of restricted shares from March 2012 was recognized during the thirteen weeks endedAugust 3, 2013 compared to the $65.3 million repayment that we made during the thirteen weeks endedJuly 28, 2012.

first quarter of fiscal 2014.
Income Tax Expense
Income tax expense forincreased to $5.0 million in the thirteen weeks ended August 2, 2014 from $2.5 million in the thirteen weeks ended August 3, 2013, was $2.5 an increase of $2.5 million, compared to $0.8 million in income tax expense for the thirteen weeks endedJuly 28, 2012, an increase of $1.6 million or approximately 103.5%. This The increase in income tax expense was primarily the result of a $4.4$6.8 million increase in pre-tax income. Our effective tax rate was 37.7%for the thirteen weeks endedAugust 3, 20132, 2014 was 37.6% compared to 40.3% for37.7% in the thirteen weeks endedJuly 28, 2012. Our effective tax rate for the thirteen weeks endedAugust 3, 2013 was lower than the comparable period as a result of changes in the mix of projected pretax income across state jurisdictions and the Company's operating entities as a result of the Restructuring. For the remainder of fiscal 2013, we believe our effective tax rate will be approximately 38.8%.

2013.
Net Income
As a result of the foregoing, net income increased to $4.1$8.3 million in the thirteen weeks ended August 2, 2014 from $4.1 million in the thirteen weeks ended August 3, 2013, from net income an increase of $1.2approximately $4.3 million, in the thirteen weeks endedJuly 28, 2012, anincrease of $2.8 million, or 226.3%104.5%.

Twenty-Six Weeks Ended August 2, 2014 Compared to the Twenty-Six Weeks Ended August 3, 2013 Compared to the Twenty-Six Weeks EndedJuly 28, 2012

Net Sales
Net sales increased to $212.7$278.5 million in the twenty-six weeks ended August 2, 2014 from $212.7 million in the twenty-six weeks ended August 3, 2013, from $158.6 an increase of $65.8 million, in the twenty-six weeks endedJuly 28, 2012, anincrease of $54.0 million, or 34.1%30.9%. The increase was the result of a non-comparable store sales increase of $46.0$56.8 million and a comparable store sales increase of $8.0 million.$9.0 million. The increase in non-comparable store sales was primarily driven by the number of stores that opened in fiscal 20122013 but have not been open for 15 full months and new stores.stores in fiscal 2014. We plan to open 60 net newapproximately 62 stores duringin fiscal 2013.2014.


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Comparable store sales increased 5.4%4.6% for the twenty-six weeks endedAugust 3, 20132, 2014 compared to the twenty-six weeks endedJuly 28, 2012. August 3, 2013. This increase resulted from an increase of approximately 4.4%3.8% in the number of transactions in our stores and an increase in the average dollar value of transactions of approximately 1.0%0.8%.

Cost of Goods Sold and Gross Profit
Cost of goods sold increased to $143.1$188.6 million in the twenty-six weeks ended August 2, 2014 from $143.1 million in the twenty-six weeks ended August 3, 2013, from $106.9 an increase of $45.6 million, in the twenty-six weeks endedJuly 28, 2012, anincrease of $36.2 million, or 33.9%31.8%. The increase in cost of goods sold was primarily the result of a $26.5 millionan increase in the merchandise costs of goods resulting from anthe increase in sales, a $5.7 millionnet sales. Also contributing to the increase in cost of goods sold were an increase in store occupancy costs as a result ofresulting from new store openings and a $3.2 millionan increase in distribution costs primarily due to anthe increase in sales as well as the opening of a second distribution center.net sales.

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Gross profit increased to $69.6$89.8 million in the twenty-six weeks ended August 2, 2014 from $69.6 million in the twenty-six weeks ended August 3, 2013, from $51.8 an increase of $20.2 million, in the twenty-six weeks endedJuly 28, 2012, anincrease of $17.8 million, or 34.5%29.1%. Gross margin increaseddecreased to 32.3% for the twenty-six weeks ended August 2, 2014 from 32.7% in the twenty-six weeks endedAugust 3, 2013, from 32.6% for the twenty-six weeks endedJuly 28, 2012, an increase a decrease of approximately 1050 basis points. The increasedecrease in gross margin was primarily the result of thean increase in store occupancy and buying expense increasing at a lower rate than the increase in net sales as well as the timing of new store openings, which increased margin by approximately 80 basis points. This increase was partially offset by the increase in distribution costs due to the opening of a second distribution center, which decreased margin by approximately 60 basis points.

expense.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $59.2$71.2 million in the twenty-six weeks ended August 2, 2014 from $59.2 million in the twenty-six weeks ended August 3, 2013, from $49.0 an increase of $12.0 million, in the twenty-six weeks endedJuly 28, 2012, anincrease of $10.2 million, or 20.9%20.3%. As a percentage of net sales, selling, general and administrativeSG&A expenses decreased approximately 300230 basis points to 27.9%25.6% in the twenty-six weeks endedAugust 3, 20132, 2014 compared to 30.9%27.9% in the twenty-six weeks endedJuly 28, 2012. August 3, 2013. The increase in selling, general and administrativeSG&A expense was primarily the result of increases of $9.5$11.4 million in store-related expenses to support new store growth $3.5and $3.6 million of corporate relatedcorporate-related expenses, and $1.0 million of fees incurred for our secondary public offering, partially offset by a decrease of $3.7$2.0 million in stock-based compensation expense primarilyand $1.0 million of fees related to our secondary public offering that was incurred during the twenty-six weeks ended August 3, 2013. The decrease in stock-based compensation was driven by the decrease of expense related to the cancellation of certain stock options in exchange for the grant of restricted shares in March 2012.

The remaining expense and vesting related to the cancellation of certain stock options in exchange for the grant of restricted shares from March 2012 was recognized during the first quarter of fiscal 2014.
Interest Expense, Net
Interest expense, net decreased to $0.9$0.1 million in the twenty-six weeks endedAugust 3, 20132, 2014 from $1.3$0.9 million of interest expense, net in the twenty-six weeks endedJuly 28, 2012, August 3, 2013, adecrease of $0.4 million.$0.8 million. The decrease in interest expense resulted mainly from the decrease in the outstanding balance of our Term Loan Facility (see –“-“Liquidity and Capital ResourcesResources--TermTerm Loan Facilitysection below). In February 2014, we repaid the remaining principal balance outstanding under the Term Loan Facility of

$19.5 million.
Loss on Debt Extinguishment
Loss on Debt Extinguishment decreased to $0.3debt extinguishment was $0.2 million in during the twenty-six weeks endedAugust 3, 2013 from $1.6 million in the twenty-six weeks endedJuly 28, 2012, a decrease of $1.3 million. The decrease in the loss on debt extinguishment2, 2014 and is due to the $15.0$19.5 million repayment of the remaining principal balance outstanding on the $100.0 million Term Loan Facility during the in February 2014.twenty-six weeks endedAugust 3, 2013 compared to the $65.3 million repayment that was made during the twenty-six weeks endedJuly 28, 2012.

Income Tax Expense
Income tax expense forincreased to $6.9 million in the twenty-six weeks ended August 2, 2014 from $3.6 million in the twenty-six weeks ended August 3, 2013, was $3.6 an increase of $3.3 million, compared to a $0.1 million income tax expense for the twenty-six weeks endedJuly 28, 2012, anincrease of $3.5 million or approximately 92.6%. This The increase in income tax expense was primarily the result of a $9.0$9.1 millionincrease in pre-tax income. Our effective tax rate was 38.8%for the twenty-six weeks endedAugust 3, 20132, 2014 was 37.6% compared to 44.4% for38.8% in the twenty-six weeks endedJuly 28, 2012. August 3, 2013. Our effective tax rate for the twenty-six weeks endedAugust 3, 20132, 2014 was lower than the comparable periodtwenty-six weeks ended August 3, 2013 as a result of changes in the mix of projected pretax income across state jurisdictions and the Company'schanges in our operating entities as a result of the Restructuring. For the remainder of fiscal 2013, we believe our effective tax rate will be approximately Restructuring (see -“Liquidity and Capital Resources-38.8%Overview” below).

Net Income
As a result of the foregoing, net income increased to $5.6$11.4 million in the twenty-six weeks ended August 2, 2014 from $5.6 million in the twenty-six weeks ended August 3, 2013, from net income an increase of $0.1approximately $5.8 million, in the twenty-six weeks endedJuly 28, 2012, anincrease of $5.5 million or 102.2%.




2019



Liquidity and Capital Resources

Overview
Our primary sources of liquidity are cash flows from operations, historical equity financings and borrowings under our Revolving Credit Facility (defined in “-Line“-Line of Credit”Credit). Our primary cash needs are for capital expenditures and working capital. During fiscal 2012, we also entered into a Term Loan Facility (defined in “-Term Loan Facility”) and used. We repaid the proceeds to pay a dividendremaining principal balance outstanding under the Term Loan Facility in May 2012.February 2014.

Capital expenditures typically vary depending on the timing of new store openings and infrastructure-related investments. We plan to make capital expenditures of approximately $2836 million in fiscal 2013,2014, which we expect to fund from cash generated from operations. We expect to devote approximately $1617 million of our capital expenditure budget in fiscal 20132014 to construct and open 60 net new stores, with the remainder projected to be spent on corporate infrastructure, store relocations and remodels, and expansion projects, theour distribution centers and corporate infrastructure.including the new distribution center in Oldmans Township, New Jersey.

Our primary working capital requirements are for the purchase of store inventory and payment of payroll, rent, other store operating costs and distribution costs. Our working capital requirements fluctuate during the year, rising in the third and fourth fiscal quarters as we take title to increasing quantities of inventory in anticipation of our peak, year-end holiday shopping season in the fourth fiscal quarter. Fluctuations in working capital are also driven by the timing of new store openings.

Historically, we have funded our capital expenditures and working capital requirements during the fiscal year with cash on hand, net cash provided by operating activities and borrowings under our Revolving Credit Facility. We did not have any direct borrowings under our Revolving Credit Facility during the twenty-six weeks endedAugust 3, 2013.2, 2014. When we have used our Revolving Credit Facility, the amount of indebtedness outstanding under it has tended to be the highest in the beginning of the fourth quarter of each fiscal year. Over the past three fiscal years, toTo the extent that we have drawn on the facility, we have paid down the borrowings before the end of the fiscal year with cash generated during our peak selling season in the fourth quarter.

On June 12, 2013,, we completed an internal business restructuring pursuant to which we formed Five Below Merchandising, Inc., a wholly-owned subsidiary (the “Subsidiary”), and transferred to the Subsidiary assets, operations and employees related to our merchandising operations (the “Restructuring”). Following the Restructuring, the Subsidiary purchases and sells to us certain goods for sale at our retail locations, and we provide to the Subsidiary back office support, office space and other services, in each case, pursuant to agreements between us and the Subsidiary. In connection with the Restructuring, on June 12, 2013,, we amended and restated the Loan and Security Agreement (defined in “-Line of Credit”) and certain other ancillary documents to our Revolving Credit Facility in order to, among other things, allow us to form and capitalize the Subsidiary and make the Subsidiary a party to the Loan and Security Agreement as a guarantor of our obligations thereunder. The Subsidiary also acceded to the credit agreement and certain ancillary documents to our Term Loan Facility as a guarantor of our obligations thereunder. For accounting purposes, our
Our consolidated financial statements include the accounts of Five Below, Inc. and the Subsidiary. All intercompany transactions and accounts are eliminated in consolidation.

The balance outstanding under the Term Loan Facility was $19.5 million asconsolidation of August 3, 2013. Pursuant to the terms of the Term Loan Facility, due to the repayment of $65.3 million of principal under the Term Loan Facility in July 2012, we are no longer required to make minimum quarterly payments. In May 2013, we repaid $15.0 million of principal on the Term Loan Facility. This amount was classified as a current liability as of February 2, 2013. The remaining unpaid balance will be due upon maturity.

our financial statements.
Based on our growth plans, we believe that our cash position, net cash provided by operating activities and availability under our Revolving Credit Facility will be adequate to finance our planned capital expenditures, working capital requirements and debt service over the next 12 months and for the foreseeable future thereafter. If cash flows from operations and borrowings under our Revolving Credit Facility are not sufficient or available to meet our requirements, then we will be required to obtain additional equity or debt financing in the future. There can be no assurance that equity or debt financing will be available to us when we need it or, if available, that the terms will be satisfactory to us and not dilutive to our then-current shareholders.


21



Cash Flows
A summary of our cash flows from operating, investing and financing activities is presented in the following table:
table (in millions):
 Twenty-Six Weeks Ended
August 3, 2013 July 28, 2012
(in millions) (1)
Net cash used in operating activities$(5.7) $(20.6)
Net cash used in investing activities(15.1) (11.6)
Net cash (used in) provided by financing activities(14.2) 8.6
Net decrease during period in cash and cash equivalents$(35.0) $(23.6)
 Twenty-Six Weeks Ended
August 2, 2014 August 3, 2013
Net cash provided by (used in) operating activities$12.6
 $(5.7)
Net cash used in investing activities(19.7) (15.1)
Net cash used in financing activities(17.6) (14.2)
Net decrease during period in cash and cash equivalents (1)
$(24.7) $(35.0)
(1) Components may not add to total due to rounding.


20



Cash Used inProvided by (Used in) Operating Activities
Net cash provided by operating activities for the twenty-six weeks ended August 2, 2014 was $12.6 million, an increase of $18.3 million compared to the cash used in operating activities for the during twenty-six weeks endedAugust 3, 2013 was $5.7 million, a decrease of approximately $14.9 million compared to the twenty-six weeks endedJuly 28, 2012.2013. The decrease in net cash used in operating activitiesincrease was primarily the result ofdue to an increase in operating cash flows from the addition of new stores and existing store performance as well as a decreaseoffset by an increase in bonus paymentsincome taxes paid of approximately $4.4 million primarily driven by a decrease in payments to certain executive officers.$3.0 million.

Cash Used in Investing Activities
Net cash used in investing activities for the twenty-six weeks endedAugust 3, 20132, 2014 was $15.1$19.7 million,, an increase of $3.5$4.6 million compared to the twenty-six weeks endedJuly 28, 2012 August 3, 2013 related solely to capital expenditures. The increase in capital expenditures was primarily for the build-out of our second distribution center, our new store construction, corporate infrastructure and corporate infrastructure.our distribution facilities.

Cash (Used in) Provided byUsed in Financing Activities
Net cash used in financing activities for the twenty-six weeks endedAugust 3, 20132, 2014 was $14.2$17.6 million,, an increase of $22.7$3.4 million compared to the net cash provided byused in financing activities forof $14.2 million in the twenty-six weeks endedJuly 28, 2012. August 3, 2013. The increase in net cash used in financing activities was primarily the result of the $15.0 million principal repayment on the Term Loan Facility (see below) during the twenty-six weeks endedAugust 3, 2013 compared to $100.0 million of proceeds from our Term Loan Facility and $74.3 million of net proceeds from our initial public offering, partially offset by $99.5 million of dividend payments, and a $65.3$19.5 million principal repayment on the Term Loan Facility during the twenty-six weeks endedJuly 28, 2012 August 2, 2014 compared to the $15.0 million principal repayment on the Term Loan Facility during the twenty-six weeks ended August 3, 2013. As of .August 2, 2014, there was no balance outstanding under the Term Loan Facility.
Term Loan Facility
On May 16, 2012, we entered into a $100.0 million Term Loan Facility with Goldman Sachs Bank USA as administrative agent for a syndicate of lenders (the “Term Loan Facility”). We used the net proceeds from the Term Loan Facility and cash on hand to pay a dividend on our common and preferred stock, totaling $99.5 million.

The Term Loan Facility provided for a term loan of $100.0 million and matures on the earlier of (i) May 16, 2015 and (ii) the date on which such facility is accelerated following the occurrence of an event of default. The Term Loan Facility provides for interest on borrowings, at our option, at an alternate base rate which is the greater of (i) the administrative agent’s prime rate in effect on such day and (ii) the federal funds effective rate in effect on such day plus 0.50% with a 2.00% floor, plus a margin of 3.25%, or a London Interbank Offer Rate (“LIBOR”) based rate with a 1.00% floor plus a margin of 4.25%. The credit agreement for the Term Loan Facility includes a maximum consolidated net leverage ratio financial covenant, the calculation of which allows us to net up to $10.0 million of our cash and cash equivalents against our indebtedness. Our leverage ratio must not exceed 2.75x to 2.50x for the testing periods in calendar year 2013, 2.00x for the testing periods in calendar year 2014 and 1.75x thereafter.

The credit agreement for the Term Loan Facility also includes customary negative and affirmative covenants including, among others, limitations on our ability to: (i) incur additional debt; (ii) create liens; (iii) make certain investments, loans and advances; (iv) sell assets; (v) pay dividends or make distributions or other restricted payments; (vi) engage in mergers or consolidations; or (vii) change our business.

The Term Loan Facility is subject to repayment upon the receipt of certain proceeds, including those from the sale of certain assets, insurance proceeds and indebtedness not otherwise permitted. The Term Loan Facility was also subject to repayment of $50.0 million upon the receipt of proceeds from our initial public offering (the "IPO"). We closed the IPO on

22



July 24, 2012. In July 2012, we repaid $65.3 million of principal against the Term Loan Facility and $0.7 million of interest. In October 2012 and May 2013, we repaid $0.3 million and $15.0 million, respectively, of principal on the Term Loan Facility. As of August 3, 2013, the balance outstanding under the Term Loan Facility was $19.5 million bearing interest at a rate of 5.25%. Pursuant to the terms of the Term Loan Facility, due to the repayment of $65.3 million of principal under the Term Loan Facility in July 2012, we are no longer required to make minimum quarterly payments. The remaining unpaid balance will be due upon maturity.

In connection with the Term Loan Facility, we incurred deferred financing costs of $2.7 million which are being amortized over the term of the Term Loan Facility. The amortization is included in interest expense, net, in the consolidated statements of operations. In connection with the $65.3 million principal repayment on the Term Loan Facility in July 2012 and the $15.0 million principal repayment on the Term Loan Facility in May 2013, approximately $1.6 million and $0.3 million, respectively, of the deferred financing costs were written off and included in loss on debt extinguishment in the consolidated statements of operations for the thirteen and twenty-six weeks endedJuly 28, 2012 and August 3, 2013. The remaining deferred financing costs, net of amortization, are included in other assets on the balance sheet at August 3, 2013.

Amounts under the credit agreement for the Term Loan Facility may become due upon certain events of default including, among others, failure to comply with the credit agreement’s covenants, bankruptcy, default on certain other indebtedness or a change in control. The default rate under the Term Loan Facility is 2.00% per annum.

On June 12, 2013 in connection with the Restructuring, the Subsidiary acceded to the credit agreement and certain ancillary documents to the Company's Term Loan Facility as a guarantor of the Company's obligations thereunder.

All obligations In February 2014, we repaid the remaining principal balance outstanding under the Term Loan Facility are secured by substantially all of our assets and are guaranteed by
the Subsidiary. As of $19.5 million.August 3, 2013, we were in compliance with the financial covenant and other covenants applicable to us under the Term Loan Facility.

Line of Credit
On August 18, 2006, we entered into a loan and security agreement (the “Loan and Security Agreement”) with a bank that included a revolving line of credit with advances tied to a borrowing base. The Loan and Security Agreement has been amended and/or restated several times, the latest on June 12, 2013 (as amended and restated, the “Revolving Credit Facility”), generally to extend the maturity date, increase maximum borrowings, adjust the applicable interest rates, permit the formation and capitalization of subsidiaries, make the Subsidiary a party to the agreement as a guarantor of our obligations and modify certain definitions.
The Revolving Credit Facility allows maximum borrowings of $20.0 million with advances tied to a borrowing base and expires on the earliest to occur of (i) May 16, 2017 (ii) the date which is 45 days prior to the maturity date of the Term Loan Facility if the Term Loan Facility remains outstanding or (iii)(ii) upon the occurrence of an event of default. The Revolving Credit Facility may be increased to $30.0 million upon certain conditions. The Revolving Credit Facility includes a $5.0 million sub limit for the issuance of letters of credit. The borrowing base is 90% of eligible credit card receivables plus 90% of the net recovery percentage of eligible inventory less established reserves.

The Revolving Credit Facility provides for interest on borrowings, at our option, at (a) a prime rate plus a margin of (i) 0.75%if excess availability is greater than or equal to 75%, (ii) 1.0% if excess availability is less than 75%but greater than or equal to 33% or (iii) 1.25%if excess availability is less than 33% or (b) a LIBOR-based rate plus a margin of (i) 1.75% if excess availability is greater than or equal to 75%, (ii)2.00% if excess availability is less than 75% but greater than or equal to 33% or (iii) 2.25% if excess availability is less than 33%. The Revolving Credit Facility further provides for a letter of credit fee equal to the LIBOR-based rate plus (i) 1.75% if excess availability is greater than or equal to 75%, (ii) 2.00% if excess availability is less than 75% but greater than or equal to 33% or (iii) 2.25% if excess availability is less than 33%. The Revolving Credit Facility also contains an unused credit facility fee of 0.375% per annum and is subject to a servicing fee of $12,000approximately $12.0 thousand per year.

The Revolving Credit Facility includes a covenant which requires us to maintain minimum excess collateral availability of no less than the greater of (i) 10%of the then effective maximum credit and (ii) $3.0 million.

$3.0 million.
The Revolving Credit Facility also includes customary negative and affirmative covenants including, among others, limitations on our ability to (i) incur additional debt; (ii) create liens; (iii) make certain investments, loans and advances; (iv) sell assets; (v) pay dividends or make distributions or other restricted payments; (vi) engage in mergers or consolidations; or (vii) change our business.

21


Additionally, the Revolving Credit Facility is subject to payment upon the receipt of certain proceeds, including those from the sale of certain assets and is subject to an increase in the interest rate on borrowings and the letter of credit fee of

23



2.0% upon an event of default. Amounts under the Revolving Credit Facility may become due upon certain events of default including, among others, failure to comply with the Revolving Credit FacilityFacility’s covenants, bankruptcy, default on certain other indebtedness or a change in control.

As of August 3, 2013, we2, 2014, the Company had no borrowings outstandingunder the Revolving Credit Facility and had approximately $19.1$20.0 million of the $20.0 million available on the line of credit under the Revolving Credit Facility as approximately $0.9 million was outstanding in letters of credit.

All obligations under the Revolving Credit Facility are secured by substantially all of our assets and are guaranteed by the Subsidiary. As of August 3, 2013,2, 2014, we were in compliance with the covenants applicable to us under the Revolving Credit Facility.

Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions. Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment. Actual results may vary from estimates in amounts that may be material to the financial statements. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our consolidated financial statements. Our critical accounting policies and estimates are discussed in the Annual Report. We believe that there have been no significant changes to our critical accounting policies during the twenty-six weeks endedAugust 3, 2013.2, 2014.


Contractual Obligations

Except as set forth below, there have been no material changes to our contractual obligations as disclosed in the Annual Report, other than those which occur in the ordinary course of business.

From February 2, 20132014 to August 3, 20132, 2014, we have entered into 2339 new fully executed retail leases with an average term of 10 years and other lease modifications that have future minimum lease payments of approximately $37.5 million. $64.9 million. We also signed a lease for a new distribution center in Oldmans Township, New Jersey that expires in 2025 with options to renew for three successive five-year periods with future minimum lease payments of approximately $44.6 million.
In addition, as of August 3, 2013, the2, 2014, there was no remaining balance outstanding under the Term Loan Facility was $19.5 million. Pursuant to the terms of the Term Loan Facility, due to the $19.5 million repayment of $65.3 million of principal under the Term Loan Facility in July 2012, we are no longer required to make minimum quarterly payments. The remaining unpaid balance will be due upon maturity. The balance bears an interest rate of 5.25%.February 2014.


Off BalanceOff-Balance Sheet Arrangements

As of and forFor the twenty-six weeksquarterly period ended August 3, 20132, 2014, except for operating leases entered into in the normal course of business, we were not party to any material off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, net sales, expenses, results of operations, liquidity, capital expenditures or capital resources.


24



ItemITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk
Our principal market risk relates to interest rate sensitivity, which is the risk that future changes in interest rates will reduce our net income or net assets. We have a Revolving Credit Facility which includes a revolving line of credit with advances tied to a borrowing base, and a Term Loan Facility, both of which bearbears interest at a variable rate. Because our Revolving Credit Facility and Term Loan Facility bearbears interest at a variable rate, we will be exposed to market risks relating to changes in interest rates.

As of August 3, 20132, 2014, we had no borrowings outstanding and had approximately $19.1 million of the $20.0 million available on the line of credit under the Revolving Credit Facility as approximately $0.9 million was outstanding in letters of credit.Facility. The Revolving Credit Facility provides for interest on borrowings, at ourthe Company's option, at (a) a prime rate plus a margin of (i) 0.75%if excess availability is greater than or equal to 75%, (ii) 1.0% if excess availability is less than 75%but greater than or equal to 33% or (iii) 1.25%if excess availability is less than 33% or (b) a LIBOR-based rate plus a margin of (i) 1.75% if excess availability is greater than or equal to 75%, (ii)2.00% if excess availability is less than 75% but greater than or equal to 33% or (iii) 2.25% if excess availability is less than 33%. The Revolving Credit Facility further provides for a letter of credit fee equal to the LIBOR-based rate plus (i) 1.75% if excess availability is greater than or equal to 75%, (ii) 2.00% if excess availability is less than 75% but greater than or equal to 33% or (iii) 2.25% if excess availability is less than 33%.

As of August 3, 2013, the principal amount of the Term Loan Facility was $19.5 million. The Term Loan Facility provides for interest on borrowings, at our option, at an alternate base rate which is the greater of (i) the administrative agent's prime rate in effect on such day and (ii) the federal funds effective rate in effect on such day plus 0.50% with a 2.00% floor plus a margin of 3.25% or a LIBOR-based rate with a 1.00% floor plus a margin of 4.25%. Based on a sensitivity analysis at August 3, 2013, a 100 basis point increase in market interest rates would increase our annual interest expense on the Term Loan Facility by approximately $0.2 million. We do not use derivative financial instruments for speculative or trading purposes, but this does not preclude our adoption of specific hedging strategies in the future.

22


Impact of Inflation
Our results of operations and financial condition are presented based on historical cost. While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we believe the effects of inflation, if any, on our historical results of operations and financial condition have been immaterial. We cannot assure you, however, that our results of operations and financial condition will not be materially impacted by inflation in the future.


25



ITEM 4.CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures
Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as defined in Rule 13(a)-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”).Act. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q are effective at a reasonable assurance level in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures will prevent or detect all errors and all fraud. While our disclosure controls and procedures are designed to provide reasonable assurance of their effectiveness, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

Changes in Internal Control over Financial Reporting
There waswere no changechanges to our internal control over financial reporting during the thirteen weeks endedAugust 3, 20132, 2014 that hashave materially affected, or that isare reasonably likely to materially affect, our internal control over financial reporting.


26



PART II—II - OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

We are subject to various proceedings, lawsuits, disputes, and claims arising in the ordinary course of our business. Many of these actions raise complex factual and legal issues and are subject to uncertainties. Actions filed against us from time to time include commercial, intellectual property, customer, and employment actions, including class action lawsuits. The plaintiffs in some actions seek unspecified damages or injunctive relief, or both. Actions are in various procedural stages, and some are covered in part by insurance. We cannot predict with assurance the outcome of actions brought against us. Accordingly, adverse developments, settlements, or resolutions may occur and negatively impact income in the quarter of such development, settlement or resolution. If a potential loss arising from these lawsuits, claims and pending actions is probable and reasonably estimable, we record the estimated liability based on circumstances and assumptions existing at the time. Although the outcome of these and other claims cannot be predicted with certainty, management does not believe that the ultimate resolution of these matters will have a material adverse effect on our financial condition or results of operations.


23


ITEM 1A.RISK FACTORS

Risk factors that affect our business and financial results are discussed in Part I, “Item 1A. RiskItem 1A "Risk Factors,” in our Annual Report. Except as set forth below, thereThere have been no material changes in our risk factors from those previously disclosed in our Annual Report. You should carefully consider the risks described in our Annual Report, and below, which could materially affect our business, financial condition or future results. The risks described in our Annual Report and below are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results. If any of the risks actually occur, our business, financial condition, and/or results of operations could be negatively affected.

New regulations related to conflict minerals could adversely impact our business.
The Securities and Exchange Commission has promulgated final rules mandated by the Dodd-Frank Act regarding disclosure of the use of tin, tantalum, tungsten and gold, known as conflict minerals, included in components of products either manufactured by public companies or for which public companies have contracted to manufacture. These new rules require due diligence to determine whether such minerals originated from the Democratic Republic of Congo (the “DRC”) or an adjoining country and whether such minerals helped finance the armed conflict in the DRC. The first conflict minerals report required by the new rules is due by May 31, 2014 and annually thereafter. While we do not manufacture products, we may be deemed to contract to manufacture products. There will be costs associated with complying with these disclosure requirements, including costs to determine the origin of conflict minerals used in any products we are deemed to contract to manufacture. In addition, the implementation of these rules could adversely affect the sourcing, supply and pricing of materials used in our products. Also, we may face reputational challenges if the due diligence procedures we implement do not enable us to verify the origins for all conflict minerals or to determine that such minerals are DRC conflict-free.


ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The table below sets forth information regarding repurchases of our common stock during the second fiscal quarter of
2013. The shares represent shares of our common stock that we have elected to repurchase due to a termination of employment prior to vesting. We do not consider this a share buyback program.

27



Period
(a)
Total
Number of
Shares (or
Units)
Purchased

(b)
Average
Price
Paid per
Share
(or Unit)


(c)
Total
Number of
Shares (or
Units)
Purchased
as Part of
Publicly
Announced
Plans or
Programs


(d)
Maximum
Number (or
Approximate
Dollar Value)
of Shares
(or Units)
that May Yet
Be
Purchased
Under the
Plans or
Programs

May 5, 2013 through June 1, 2013259
$11.45

$
June 2, 2013 through July 6, 2013


July 7, 2013 through August 3, 2013


Total259
$11.45

$

None.
ITEM 3.DEFAULTS UPON SENIOR SECURITIES

None.
Not applicable.
ITEM 4.MINE SAFETY DISCLOSURES

Not applicable.
ITEM 5.OTHER INFORMATION

None.


2824



ITEM 6.EXHIBITS

(a)Exhibits
 
No. Description
   
10.1Employment Letter and Non-Disclosure Agreement, each dated June 8, 2014, by and between Joel D. Anderson and Five Below, Inc. (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed with the Securities and Exchange Commission (the “Commission”) on June 12, 2014).
10.2Employment Letter and Non-Disclosure Agreement, each dated May 21, 2014, by and between Eric M. Specter and Five Below, Inc. (incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K filed with the Commission on June 12, 2014).
10.3 
Form of Non-Qualified Stock Option Agreement (Employees)

for Executives (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed with the Commission on June 30, 2014).
   
10.4 Form of Non-Qualified Stock Option Agreement (Executives)for Employees (incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K filed with the Commission on June 30, 2014).
10.5Form of Award Agreement for Restricted Stock Units (incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K filed with the Commission on June 30, 2014).
   
31.1 Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2 Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
101† The following financial information from this Quarterly Report on Form 10-Q for the fiscal quarter ended August 3, 2013,2, 2014, formatted in XBRL (Extensible Business Reporting Language) and furnished electronically herewith: (i) the Unaudited Consolidated Balance Sheets as of August 2, 2014, February 1, 2014 and August 3, 2013, February 2, 2013 and July 28, 2012;2013; (ii) the Unaudited Consolidated Statements of Operations for the Thirteen Weeks Ended and Twenty-Six Weeks Ended August 2, 2014 and August 3, 2013 and July 28, 2012;2013; (iii) the Unaudited Consolidated Statement of Shareholders’ Equity for the and Twenty-Six Weeks Ended August 3, 2013;2, 2014; (iv) the Unaudited Consolidated Statements of Cash Flows for the and Twenty-Six Weeks Ended August 2, 2014 and August 3, 2013 and July 28, 2012 and (v) the Notes to Unaudited Consolidated Financial Statements, tagged in detail.
*

Incorporated by reference.
Pursuant to applicable securities laws and regulations, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Exchange Act of 1934, as amended, and otherwise is not subject to liability under those sections.



2925



SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
  FIVE BELOW, INC.
   
Date: September 10, 201311, 2014 /s/ Thomas G. Vellios
  Thomas G. Vellios
  
President and Chief Executive Officer
(duly authorized officer and Principal Executive Officer)
   
Date: September 10, 201311, 2014 /s/ Kenneth R. Bull
  Kenneth R. Bull
  
Chief Financial Officer (Principal
(Principal Financial Officer and Principal Accounting Officer)



3026



EXHIBIT INDEX
 
No.  Description
10.3
Form of Non-Qualified Stock Option Agreement (Employees)

10.4Form of Non-Qualified Stock Option Agreement (Executives)
   
31.1  Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2  Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.1  Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
32.2  Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
101†  
The following financial information from this Quarterly Report on Form 10-Q for the fiscal quarter ended August 3, 2013,2, 2014, formatted in XBRL (Extensible Business Reporting Language) and furnished electronically herewith: (i) the Unaudited Consolidated Balance Sheets as of August 2, 2014, February 1, 2014 and August 3, 2013, February 2, 2013 and July 28, 2012;2013; (ii) the Unaudited Consolidated Statements of Operations for the Thirteen Weeks Ended and Twenty-Six Weeks Ended August 2, 2014 and August 3, 2013 and July 28, 2012;2013; (iii) the Unaudited Consolidated Statement of Shareholders’ Equity for the and Twenty-Six Weeks Ended August 3, 2013;2, 2014; (iv) the Unaudited Consolidated Statements of Cash Flows for the and Twenty-Six Weeks Ended August 2, 2014 and August 3, 2013 and July 28, 2012 and (v) the Notes to Unaudited Consolidated Financial Statements, tagged in detail.
Pursuant to applicable securities laws and regulations, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Exchange Act of 1934, as amended, and otherwise is not subject to liability under those sections.


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